- Low interest rates, lure of quick gains bring back the small investor

SATISH JOHN

Mumbai, Dec. 22: The retail investor is stampeding back into the stock markets once again — greedy for the lucre that the bullish bourses promise.

“Increasingly, I see a sense of desperation in them,” says Ramesh Damani, a prominent broker affiliated to the Bombay Stock Exchange.

It’s taken close to three years to lure them back into the market. After the meltdown in stock prices in 2000 when the markets were rocked by the stock market scam engineered by rogue broker Ketan Parekh (who was banished last week from the bourses for 14 years), the scalded retail investor had scurried out and could never work up enough courage to invest in stocks.

But the confidence has returned — and the whoopee ride that the stocks have ridden over the past eight months have persuaded timorous investors to hop on to the roller-coaster.

There’s a difference this time: they have been drawn by a combination of several factors. For starters, the sensex — the 30-stock index that is a barometer of the mood of the market — has leapt by close to 90 per cent since late April when the rally began.

On Monday, the sensex leapt to a new 45-1/2 month peak at 5577.96, an increase by another 36.61 points. The optimists that the market breeds with every rally gung-ho with predictions that it will hit 7000 next year.

It’s also been fuelled by the fact that interest rates have been crashing to historic lows — closing down the investment options for households who were once used to over 10 per cent returns and now find themselves having to settle for anything around 6 per cent.

However, there’s a caveat: as the party in the stock markets get merrier, there is a horde of investors waiting to get in having missed the fun so far, say marketmen. The risks are much higher for recent entrants into the markets as share prices have, in some cases, more than doubled or trebled.

“The euphoria is getting dangerous, it does not make you feel comfortable,” says Navin Roy, dealer at Taib Securities, a foreign broker having operations in the local stock markets here.

“I am surprised at the interest as strangers walk up to me to get a feel of the market pulse,” Roy adds. “When I go to the gym, there are intelligent guys like software professionals and doctors asking for stock tips.”

Market favourites like Reliance, Tata Motors, Tata Steel have doubled or trebled since last year. An institutional broker, who preferred not to be quoted, says, “One doesn’t push scrips from the cliff.” While he is not admitting that shares are near its peak, he is chary to buy stocks which have already run-up. “Let us wait for a correction,” he says.

But the market is in no mood to listen. Already, dates are being advanced. Markets are in a tearing hurry to cross the 6000-mark and break the all-time peak before March, 2004.

K. Ramakrishnan, a small investor and a believer in equity investment even during bad times, says his colleagues and neighbours have started contacting him for stock tips. “I also find it difficult to tap my broker and analyst friends who obviously are now very busy,” he says.

He is taking his chartist friend out for lunch tomorrow, to renew his contacts especially when the markets are upbeat. In his office, the telephone operator has decided to pay a visit to his broker after a gap of two years.

“Yes, we do see the return of small investors,” says Jignesh Shah, portfolio manager at ASK RJ Investment Services, a premier portfolio and broking house. The number of small investors entering the market is increasing by the day, he adds.

“As long as they study the markets and invest, it’s okay. But if they buy based on tips, it’s dangerous,” he cautions.

Beyond the anecdotal evidence, there are some hard figures to back up the story. CDSL, one of the two depositories that dematerialise physical share certificates and store certificates electronically, reflects the change in the market mood.

The number of demat accounts as on December 18, 2003 for CDSL has risen by over 88 per cent to 4.66 lakh accounts, as against 2.47 lakh accounts on March 31, 2003.

NSDL, the leading depository in the country that had a headstart over CDSL, has already acknowledged the sudden surge in transactions. It has dropped transaction fees by a wholesome 20 per cent last week.

On a larger base, it has registered 45.24 lakh investor accounts, up by over 22 per cent from 37 lakh demat accounts as on March 31, 2003. A CDSL official says the depository is also witnessing a 50 per cent jump in buy-and-sell transactions.

Foreign funds, the main drivers of the rally, are still believers of the potential of Indian companies. FII broker CLSA, after concentrating on index heavyweights, have recently issued a report on 18 mid-cap companies.

The IPOs of state-owned banks and Maruti Udyog were the real triggers for the retail investor, says an observer.

Earlier this year, Sebi chairman G. . Bajpai had said that the disappearance (of small investors) is always sudden, but their coming back is also slow. The success of public sector banks’ IPOs lend credence to the belief he had then expressed. The Union Bank’s initial offer attracted 3.5 lakh applicants. What was impressive of the bank IPO was that 1.45 successful applicants appeared to be first timers as they also simultaneously opened new demat accounts.

Maruti, the leading car maker’s IPO accelerated the trend as retail investors slowly trooped back into the primary market, often referred for initial public offers.

Now, retail investors are back into the secondary market. As they troop in shares of almost dead companies are rustling back to life attracting retail investors fond of penny stocks.

Sebi has been keeping abreast of the shenanigans that are part of the bull market by raising margins and setting limits on stock splits. But how much can it do'